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| History of the U.S. Debt Limit1 |
The last time Congress raised the debt ceiling was in February of 2010. At the time, it was increased by almost $2 trillion.
The fight in Congress over the debt ceiling and fears of a government shutdown are all over the airwaves, so I thought I would touch on a few aspects of the debate, and frame the context for the battle currently being waged in Washington.
History of the Debt Ceiling
The debt ceiling first came into existence in September of 1917. At the time, Congress authorized the issuance of $7.5 billion of bonds and another $4 billion of certificates of indebtedness under the Second Liberty Bond Act.
If we take that $11.5 billion dollars, adjust it for inflation from 1917 through 2011, outstanding debt would have increased to just over $193 billion dollars. The current debt limit exceeds $14 trillion. Washington’s “love affair” with debt has not only grown, it has grown exponentially since 1982.
Looking at the statistics of how US government debt has grown historically, I think it is important to look at two key points:
1. The debt ceiling did not hit the “magic” $1 trillion mark until 1982… less than 30 years ago.
2. Increases in the debt ceiling are quite common. Over this 94 year period since 1917, the debt ceiling was revised 102 times!
Also of interest, Congress has NEVER refused a President’s request to increase the debt ceiling, which is part of the current problem.
A second way to look at the debt ceiling is to look at it in relation to the nation’s Gross Domestic Product (“GDP”); or the market value of all final goods and services produced within a country in a given period. Looking at all available data on this comparison dating back to 1929, we can see that the all-time high for the debt limit to GDP occurred right after WW II when it exceeded 120 % of GDP. If Congress votes to increase the debt ceiling again this year, the debt limit could once again reach 100 percent of GDP. While the U.S. may not be fighting a world war this time around, it is borrowing money like it is.
Options for policy makers to bring debt levels down and cure its addiction to debt-related expenditures are to cut spending, raise taxes, or both.
Why Does the Debt Ceiling Exist?
In a nutshell, the debt ceiling is Congress’s way of setting a limit on how much the U.S. Treasury can borrow. Our Constitution presents Congress with the task of managing both spending and borrowing. When Congress’s appetite for spending exceeds available funds, the government borrows money via U.S. Treasury securities.
While the debt ceiling was proposed with good intentions, it has done little to stop our nation’s exponential rise in debt. More recently, it has become a source of political grandstanding, as policy makers attempt to “stand tall” against a debt problem of their own making.
How Could the U.S. Lose its Aaa/AAA Credit Rating?
According to the credit analysts at Standard and Poor’s, the rating agency would downgrade the quality of U.S. debt for the following reasons:
1. If Congress and the administration fail to come up with a “credible solution” to the U.S. debt and show no signs of agreeing on one in the foreseeable future.
2. If the United States misses any scheduled debt service payments, in which case S&P would issue a “selective default,” meaning a default has occurred on some bonds but not others.
3. If S&P concludes that the debt debate calls into question policy makers willingness and ability to timely honor the U.S. scheduled debt obligations.
How Does the Stalemate Get Addressed?
I think investors and Americans in general, would very much like to see a bold resolution to the current debt debate. In the end, though, a mini deal that satisfies neither side will probably get through and the debt ceiling will be increased. For the optimists, a grand bargain on spending, taxes, and debt will have to wait until after the next election.
From an investment standpoint, for the markets to retain their composure, they do not so much need a solution to the “crisis” as they need more certainty about the direction policy makers will take over the next few years. Stay tuned as the debt debate rages on.
Source 1: U.S. Treasury
Source 2: U.S. Treasury, Bureau of Economic Analysis
Source 3: Jason Geopfert - Sundial Capital Research, Inc.
